India’s Essar Group, controlled by billionaire brothers Shashikant and Ravikant Ruia, is considering delisting all its publicly traded units and plans to sell some assets, people with knowledge of the matter said.
The group plans to take Essar Ports Ltd. (ESRS), Essar Shipping Ltd. (ESL) and Essar Oil Ltd. (ESOIL) private over the next couple of years, the people said, asking not to be identified as the deliberations are confidential. The Ruias are already in the process of delisting Essar Energy Plc (ESSR) from the London Stock Exchange.
Mumbai-based Essar Group wants to buy all the shares it doesn’t already own in its listed units as it considers them undervalued, the people said. The conglomerate is weighing the sale of international outsourcing operations and a U.S. iron-ore business and may sell additional assets after completing the privatizations, they said.
Turning them private would give the Ruia brothers a free hand to revamp the companies, said Amit Tandon, founder and managing director of Institutional Investor Advisory Services India Ltd. The brothers are overhauling the group as Indian family-run companies including Jaypee Group (JPA) and GMR Group come under pressure to sell assets after racking up debt.
“Essar may have taken a view that they would prefer a freer rein in running their businesses,” Mumbai-based Tandon said. “A listed entity has to seek frequent shareholder approvals, face greater public scrutiny and make many more disclosure filings.”
The units Essar Group is seeking to privatize have a combined market value of about $4.3 billion, data compiled by Bloomberg show.
As a policy, Essar doesn’t comment on speculation, it said in an e-mail yesterday in response to queries on delisting and the iron ore business. Essar Ports and Essar Oil said in filings yesterday that they haven’t received any delisting approvals from their founders.
Shares of Essar Oil fell 3.5 percent today to 86.50 rupees as of 10 a.m. in Mumbai after jumping 16 percent yesterday to the highest level since March 2013. Essar Ports slumped 9.6 percent after surging 16 percent yesterday, while Essar Shipping rose 1.6 percent after yesterday’s 14 percent rally.
Combined borrowings at the country’s top 10 business groups had risen more than sixfold since 2007 to 6.31 trillion rupees ($107 billion) by March 2013, Credit Suisse Group AG wrote in an August 2013 report. Essar Group’s debt quadrupled to 984 billion rupees by the end of March 2013, from 246 billion rupees in 2007, after increasing capital expenditures across its businesses, according to the Credit Suisse report.
Essar Group said at the time “such snapshots are an unfair measure of the health of industrial groups, given they show just the costs of investments, not the future income from these investments.” The conglomerate’s units are refinancing “high-cost” rupee loans with dollar debt and overseas income provides a natural hedge, it said.
Delisting the companies may be contingent upon the availability of funds, said P. Phani Sekhar, a fund manager at Angel Broking Ltd. in Mumbai. With a stock rally riding on investor enthusiasm for a new government headed by Prime Minister-designate Narendra Modi, it may get more expensive for the founders, he said.
“Things improving in India may make any delisting difficult,” he said.
Essar Ports trades at 8.8 times last year’s earnings, while rival Adani Ports & Special Economic Zone Ltd. is valued at 27.2 times, according to data compiled by Bloomberg. Shares of Essar Oil have tumbled 83 percent in the six years through 2013, compared with a 4.4 percent rise in the benchmark S&P BSE Sensex (SENSEX) index.
The Ruia brothers have a combined net worth of about $8 billion, according to the Bloomberg Billionaires Index.
After privatizing the units, the Ruia brothers plan to manage their holdings like private-equity investments and may buy or sell assets, the people said. Essar Group plans to freeze major capital expenditure for the next couple of years, according to the people.
Essar Group has spent $18 billion over the last six years and most of these investments have been completed, it said in its e-mailed statement. Essar Energy plans to invest in Essar Oil, the company said, without specifying the amount.
The group plans to sell some of the international operations of its call-center and business outsourcing unit Aegis Ltd. and is seeking an enterprise value of $600 million, the people said. The arm has operations across 13 countries including the U.S., Argentina and the Philippines with more than 55,000 employees, according to the Aegis website.
Essar isn’t considering a sale of Aegis and is focusing on expanding that business, it said in the e-mail statement.
The group will also consider selling Essar Steel Minnesota LLC, which is investing $1.8 billion to develop a seven-million-ton per year iron ore pellet facility, one of the people said. The unit raised $450 million through an offering of six-year bonds earlier this year, according to a May 14 statement.
The sale, which could take place after the facility becomes operational, may value Essar Steel Minnesota at about $2 billion including net debt, the person said.
A rise in rupee funding costs and a slowdown in economic growth to a decade-low have strained the finances of Indian companies. The yield on five-year rupee-denominated corporate bonds touched 10.75 percent in August, the highest level since end-2008, from as low as 7.27 percent in April 2009, according to data from the Fixed Income Money Market & Derivatives Association of India.
Jaiprakash Associates Ltd., the builder of India’s only Formula One racing track, agreed to sell a cement plant in September for an enterprise value of 38 billion rupees as part of an effort to pare debt. Its energy unit, Jaiprakash Power Ventures Ltd., agreed to sell two hydropower plants in March for $1.6 billion.
GMR Infrastructure Ltd., operator of India’s biggest airport, last month completed the sale of a 40 percent stake in Istanbul’s Sabiha Gokcen International Airport for 17.4 billion rupees. In September, it agreed to sell a 74 percent stake in a highway project in Tamil Nadu state for 2.22 billion rupees.
Standard Chartered Plc, ICICI Bank Ltd., Axis Bank Ltd. and State Bank of India are among the largest lenders to Essar Group, according to company filings. In October, Mumbai-based Credit Analysis & Research Ltd. assigned Essar Steel’s long- and short-term debt facilities of 315 billion rupees its lowest non-investment grade rating.
Standard Chartered has shifted about $3 billion of its loans to Essar Group to a unit that focuses on recovery, meaning it will need to set aside additional capital for the debt, one person said. It had transferred part of the about $400 million of debt owed by Essar Steel to its Group Special Asset Management last year, the person said.
Essar Steel “has been paying its dues to lenders regularly,” the company said in the e-mail.
“We don’t discuss client relationships, but we are comfortable with the shape of our portfolio in India,” said Subhayu Mishra, a Mumbai-based spokesman for the U.K. lender.
A subsidiary of the Ruias’ buyout company Essar Global Fund Ltd. offered in March to spend $793 million to buy the remaining stake the brothers don’t already own in Essar Energy, as well as the company’s outstanding convertible bonds. The Ruias own a 78 percent stake in Essar Energy, data compiled by Bloomberg show.
An independent panel set up by Essar Energy’s board to evaluate the offer said this month it “reluctantly” believes shareholders should “seriously consider” accepting it, after rejecting the same offer in February as too low.
Essar Group attempted to delist Essar Oil and Essar Shipping in 2007 before dropping the plans. It delisted Essar Steel in the same year.
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